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“The Feds justification for being brought into existence was to stabilize an anarchic banking system and prevent panics and depressions. It did a piss poor job this time around”

Frankly, from some economists I have read, the Fed, created a decade before the 1929 stock market crash, helped, with its policies, to contribute to the conditions that led to that crash and the depression. The depression was not CAUSED by “Wall Street”, stocks were simply on the “early warning end”, an early casualty of factors and forces that included Fed policy as well as trade protectionism. Wall Street did not create the bubble, it reflected, in stocks, a financial bubble that had been introduced into the system. If there had not been a “Wall Street”, that financial excess would have found some other outlet and eventually “crashed” as well. Media driven ignorance and politically biased non-wisdom has focused the public psyche on the “1929 crash”, as “leading” to the depression. It was a leading indicator of an inflated financial system, not the cause of it.

“as it let banks and Wall Street run wild with bundled mortgages and credit default swaps.”

That’s the SEC’s job, not the Fed’s.

SMEs (bundled mortgages) were around for more 20 years and not a problem. The problem they represented this time was not their nature but the massive, unhistorical, unprecedented portion of the total ($amount and $volume) of sub-primes contained within them, together (at the same time) as the total pool (good and bad) represented a giant real estate bubble. They represented a tipping point.

CDOs were no different. They represent “financial insurance”, in a manner not much different than you insure things. You don’t pay the full market value of what you insure, you pay a % that represents the calculated risk your insurer thinks they are taking. Again, remove the massive sub-prime bubble from within the overall mortgage bubble and you have a more normal housing downturn with a more normal default rate, and neither SMEs or CDOs are undermined.

SMEs and CDOs do not represent PRIME causes. The creation of the leverage in the economy originated with Fed policy. That changed the valuation of interest rates and risk, which from about 2002 meant that you paid less in interest to borrow money than you could earn on it in the bank. Therefore - due to Fed policy - borrowing WAS induced.

Blaming SMEs and CDOs is simply blaming the mechanisms that financial people must use to try to deal with monetary, interest rate and risk scenarios that originate with conditions laid down in the economy by the Fed.

SMEs and CDOs do, and did, what is in fact neutral, to either ups or downs - they spread the risk. In general it is a benefit. When the sub-prime mess caused the tipping point, the benefit - the spreading of risk, also meant that more institutions had assumed some of that risk.

But, under it all, was not an error in the concept, but the negligence in permitting the real estate and subprime bubbles - they represent the virus, they undermined the valuations, not the general concept of SMEs or CDOs.